With gold trending down, many investors interested in the industry are wondering which step to take. When the time comes, one of the ways to decide which gold mining stocks to invest in is analysing the characteristics of the gold industry and learning from the gurus’ moves.
From Jan. 1 to Feb. 28, the price of gold on the London Bullion Market increased by 15.58%, as shown by the picture below that reports the following five sub-periods characterized by different trends in the gold price since the beginning of the year.
Gold mining stocks increased on the New York Stock Exchange as well, and it couldn’t be otherwise since their performances on the stock market are related to changes in the price of gold. The exception was Eldorado Gold Corporation (EGO, Financial), whose share price decreased by 3% on the NYSE.
Barrick Gold Corporation (ABX, Financial) is the gold mining stock that performed the best during the observed first subperiod with 79%.
Other gold stocks that saw their prices increase during the period include Newmont Mining Corporation (NEM, Financial) with 40%, Kinross Gold Corporation (KGC, Financial) with 56%, Agnico Eagle Mines Ltd. (AEM, Financial) with 31%, Iamgold (IAG, Financial) with 56% and Yamana Gold (AUY, Financial) with 48%.
During the first sub-period when gold traded at $1,142.96 per ounce on average and ranged between a low price of $1,062.25 and a high price of $1,239.50 on the LBM, investors preferred to invest in Barrick Gold, whose gold reserves were well defined. As a matter of fact, the biggest gold producer in the world estimated its gold reserves on an assumed gold price per ounce of $1,000, lower than the average gold price on the LBM during the first subperiod.
At the end of 2015, Barrick Gold declared gold reserves of 91.9 million ounces based on an assumed gold price per ounce of $1,000.
The amount of 91.9 million represents the ounces of gold that Barrick Gold could “economically” mine from the mineral deposits at certain costs and gold prices as of the first sub-period. The average gold grade was 1.37 g/t.
The average gold grade is determined by adding the ore bodies that can be economically mined at present levels of cost and gold price.
On the other hand, Iamgold, a mid-tier gold producer, declared gold reserves of 7.69 million ounces based on an assumed gold price per ounce of $1,200. Therefore, during the same first sub-period, its gold reserves couldn’t be “economically” extracted by the company at a lower price per ounce than $1,142.69 (average on the LBM). The average gold grade of Iamgold was 1.40 g/t.
From the point of view of the value investor, it means that it was much more likely that the market price of Barrick Gold was nearest to its intrinsic value than in the case of Iamgold, whose gold reserves were estimated using a gold price per ounce higher than the market price of gold.
Therefore, during the sub-period from Jan. 1 to Feb. 28, investors preferred to buy shares of Barrick Gold, the only gold mining company that could “economically” mine gold, according to its estimates of mineral reserves. The price of the stock increased by 79%, the highest increase in the gold stock industry.
In the first quarter of 2016, among the gurus who invested in gold mining stocks, George Soros (Trades, Portfolio) stood out with a purchase of 19,419,309 shares in Barrick Gold. The Hungarian investor opened a position in the world’s biggest gold producer.
First Eagle Investment (Trades, Portfolio) reduced its position by 2.91%, but it held 37,963,196 shares of Barrick Gold as of Q1 2016.
During the second sub-period, from Feb. 25 to Aug. 1, the price of gold on the LBM was $1,272.56 per ounce on average, ranging between a low price of $1,210.50 per troy ounce and a high price of $1,370.00 per troy ounce, making the other gold mining companies also capable of “economically” mining the precious metal.
This was recognized by investors and all the other gold stocks outperformed Barrick Gold on the NYSE except for Goldcorp Inc. (GG, Financial) and Eldorado Gold. The latter, however, passed from -3% in the first sub-period to 41% in the second sub-period.
Iamgold and Yamana Gold (AUY, Financial), mid-tier gold producers, gained 120% and 113% on the NYSE.
During the second quarter of 2016, George Soros (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), John Rogers (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) reduced their positions in Barrick Gold Corporation (ABX, Financial), while Joel Greenblatt (Trades, Portfolio) sold out of his Barrick Gold shares.
The second quarter of 2016 was characterized by a huge number of Iamgold’s shares bought by Donald Smith (Trades, Portfolio), who increased his position in Iamgold by 892.68%.
During the beginning of August, gold fell on the LBM with November being the most disappointing period for gold investors. On the LBM, gold decreased by 16.62% from Aug. 1 to Dec. 15, and in November gold fell by 7.6%.
It couldn’t be different for gold mining stocks, as share prices went considerably down during the third sub-period observed, ranging from -28% of Newmont Mining Corp. (NEM, Financial) to -54% of Yamana Gold (AUY, Financial).
With gold trading well below $1,200 per ounce on the LBM, investors may turn back their investing strategies to Barrick Gold. It seems that George Soros (Trades, Portfolio) has been the most proactive in doing so, having already increased his position in Barrick Gold by 166.30% as of Q3 2016 and anticipating the downtrend in gold well in advance.
On Dec. 15, gold closed at $1,132.45 per troy ounce on the LBM, and the average price per troy ounce was $1,170.94 during the Nov. 1 to Dec. 15 period.
So, which gold mining stock is it wise to invest in?
It depends on the gold price, of course. If you think that the price of gold per ounce increases in such a way that its average for the last quarter of 2016 may not exceed $1.200 per ounce, then t would be better to invest in Barrick Gold.
If you think that gold demand drivers, such as Christmas holidays and wedding season in India, could raise the price of gold to an extent such that the average gold price for the fourth quarter of 2016 may exceed $1,200 per troy ounce, then it would be better to invest in gold mining stocks that are characterized by the highest beta gold in the industry.
The beta gold measures the exposure of gold stocks’ returns on the stock market to changes in the price of gold.
Disclosure: I have no positions in any stock mentioned in this article.
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